4. Internal Analysis
4.1 Audit Company’s Resources
4.2. Historical behavior over the past five years
4.3. Current position against competition
4.4. Market position in relation with last year’s objectives

1. Executive Summary

It is most likely that you have never seen a television commercial for Starbucks. Regardless of that fact, Starbucks has earned its reputation as possibly the most well-known coffee store of the world. Founded in 1971, the company has grown from just a few stores in Seattle, USA to 21,878 stores in 65 countries. With its 36.7 percent market share in the coffee industry and $14.89 billion revenue in 2013 alone, it’s not at all an overstatement to say that the company is a successful one.[1]

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Starbucks Sales Growth:

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As shown in the charts, Starbucks has shown stable growth in all dimensions. In terms of revenue, in just 5 years, it has increased by about 30 percent, from $10.7 billion in 2010 to $16.45 billion in 2014. Two years ago, the company already had 19,209 stores worldwide, boosting an almost 15 percent growth in just three years. It has grown continuously, reaching over 21,000 stores in 2015, in five more countries. It has been opening up not one but two stores on an average every day since 1987. As for its sales, there has always been a stable growth rate, ranging from 6 percent to 9 percent, in the past four years.

The key to such success was the differentiation strategy. Starbucks strives to offer much more than their competition. As a matter of fact, innovative ideas are embedded in the company’s mission and vision. For Starbucks, it’s not about just selling coffee. “It really is about connecting with someone in a more intimate, experiential way,” says Senior Vice-President of Marketing at Starbucks Anne Saunders.[2] The company aims to build a personal bond with everyone involved, from the suppliers, partners to their customers. Personal bonds are most likely the result of the company taking up CSR as their main value.

CSR is considered as one of their primary responsibilities at Starbucks, so, it constantly develops new ideas to positively impact the society, especially their suppliers and partners. Currently, the company is known to be a huge supporter of fair trade. It is fully committed to taking an ethical approach to sourcing through methods like farmer support, high social and environmental standards, industry collaboration and community development programs. In fact, the company became a pioneer in its industry by introducing the first sustainability standards called Coffee and Farmer Equity (C.A.F.E).[3] In addition to its suppliers, the company makes sure to go the extra mile to provide the best opportunities for its employees, or in the Starbucks way, its partners. The whole idea of being an employee at a coffee shop is enhanced at Starbucks. Starting off with their names, unlike normal baristas, the ones at Starbucks are called partners because each of them are given the chance to own some of the company’s stock. The partners are also paid one of the highest wages in the industry but it does not stop there. They are known to receive progressive benefits such as education benefits, tuition assistance and comprehensive health coverage (medical, dental and vision). In fact, Starbucks spends more on healthcare for than coffee bean purchase, showing true dedication to positively impacting its partners’ lives.[4]

The company has also introduced a new kind of relationship between the store and the customers. For Starbucks, it’s not just about the coffee. It’s about the experience, the ‘Starbucks Experience’. Not only do they focus on keeping clean and highly maintained stores, they aim to provide a cultural experience, a ‘Third Place’ for its customers. With everyone and their routinized lives, the ‘Third Place’ creates a comforting environment between the home and the workplace. To start off, all drinks are served to the customers by calling their names, to make it a bit more personal.

For the cultural aspect, all stores put careful thought into the details including the music, to make the space more relaxing. It also creates an efficient and convenient environment by providing services like free WIFI in all of its stores.

These aspects make the coffee stores a perfect fit for their target population, adults and young adults. A place to take time off their busy lives but also a productive workspace for students to do their homework and business people to write up a few documents or hold meetings.[5]

However, it wasn’t always a smooth ride; there were some bumps in the road for Starbucks at times. Like any other business, the company was hit hard by the economic crisis and the hikes in coffee bean prices made the situation worse. There were also always people frowning upon the high prices of the beverages and snacks and now with the increasing number of competitors, the company had to introduce innovative ideas to maintain its lead in the market.

To pursue its differentiation strategy, stores continuously attempt to enhance the local ‘Starbucks Experience’. At the micro level, Starbucks was fast to follow the technological trends, collaborating with big companies like Apple and also, introducing its very own phone application. On the macro level, the company increased its role as the CSR leader, for instance, executing projects to protect the environment. These actions, in the end, created a community friendly image and an inviting aura, which is probably the reason why average customers visit Starbucks at least six times a month and the hard core fans up to 16 times a month, making it truly the ‘third place’.[6]

2. Marketing Analysis

2.1. Starbucks Market Profile

60 million customers visit Starbucks every week in more than 21,000 coffee shops in about 60 countries. Almost half (49 percent) of Starbucks customers are men and women aged 25 to 40, which makes them the main target market of company. These customers tend to be elegance with relatively high income, professional careers and a focus on social welfare. This target audience grows at a rate of 3 percent annually.

Second biggest target market, which makes 40 percent of Starbucks’ sales are young adults aged 18-24. Starbucks positions itself as a place college students can hang out, study, write term papers and meet people. Starbucks appeals to this audience through introducing technology as soon as it comes available, focusing on social networking. The young adult audience grows 4.6 percent each year.

Small however quite important target audience of Starbucks are kids and teens. Together, customers age 13 to 17 account for just 2 percent of Starbucks’ sales, but most items for kids are purchased by the parents and usually both mother and child are leaving with cup in hand. Teens meanwhile use Starbucks as a place to hang out with friends or study.[7][8]

2.2. Industry Overview and Analysis

Starbucks performs and competes in the retail coffee and snacks store industry. This industry encountered a huge decline in 2009 because of the economic crisis with the industry revenue declining by 6.6 percent.

Due to this, consumers spent less on luxury products e.g. eating out, choosing to purchase low-price items instead of high-priced coffee drinks due to shrinking budgets.

It is predicted that the industry will experience a growth over the next five years at an annualized rate of 3.9 percent, which will be mainly caused by an improved economic condition. For now Starbucks dominates the industry with a market share of 36.7 percent, Dunkin Brands with 24.6 percent and other percentage are competitors like McDonalds, Costa Coffee etc.[9]

2.2.1. Industry Life Cycle and Market Share Concentration

This industry is in a mature stage with a medium level concentration, which means that growth is no longer the main focus of company. The primary goals are market share and cash flow.[10]

2.2.2. Industry Demand Determinants and Profitability Drivers

The industry’s demand for premium coffee and snack products are mainly driven by disposable income, per capita coffee consumption, attitudes towards health, world pricing of coffee and demographics. Main factors influencing the industry are macroeconomic factors that affect the household disposable growth.

During the recession, a downward movement in the revenue and profitability were caused by the decrease in household disposable income due to increased unemployment.

When household disposable income rises automatically increases the revenue of coffee and snack shops, since another crucial factor for analyzing the demand in the industry is the per capita coffee consumption and as income rises consumers start to relax their budgets.

It is predicted that during the next couple of years (to 2018) coffee bean prices are expected to decrease which will lower the prices and increase the profitability of companies in this industry as coffee beans are the primary input in the value chain of the industry participants.[11]

2.3. Porters Five Forces Analysis of the Retail Coffee and Snacks Industry

2.3.1. Threat of New Entrants

There is a moderate danger of new competitors into the industry as the obstructions to enter the market are not sufficiently high to prevent new businesses to enter, and the possibility of new entrants to be successful in the industry is moderate even if it’s a competitive industry.

However even though it is easy to entry the market, there already exists large number of successful brands like Starbucks who have achieved economies of scale by lowering cost, improved efficiency with a huge market share. There is a moderately high barrier for the new entrants as they differentiate themselves from Starbuck’s product quality.

2.3.2. Threat of Substitutes: High

Consumers also are able to make their own home-made coffee with coffee makers. However it is important that leaders of this industry such as Starbucks are putting their effort to sell coffee makers, premium coffee packs in grocery stores.

2.3.3. Bargaining Power of Buyers: Moderate to Low Pressure

There are many different buyers in this industry and demand price adjustment relies on all of them. Company offers vertically comprehended products with a diverse consumer base, which makes comparatively low volume purchases, which destroys the buyer’s power.

Consumers have a moderate sensitivity when it comes to a expensive coffee retailing as they pay a value for higher quality products however they still pay attention to exaggerated premium in relation product quality.

2.3.4. Bargaining Power of Suppliers: Low to Moderate Pressure

The main inputs of Starbucks are coffee beans and premium Arabica coffee grown in select regions which are standard inputs. This makes the cost switching between substitute suppliers moderately low.

Size and scale of Starbucks give the power to take an advantage of company’s suppliers, however company keeps a Fair trade certified coffee under its coffee and farmer equity (C.A.F.E) program, which gives its suppliers a fair partnership status accordingly yielding them some moderately, low power. The suppliers in the industry create a low threat of competing against Starbucks by forward vertical integration. Starbucks also forms a highly important part of the suppliers business, due its size and scope. Both these factors lowers the power of suppliers.

2.3.5. Competitive Rivalry: High to Moderate

There are a lot of companies operating in this industry with a monopolistic competition structure. Starbucks is having the largest markets share however company’s closest competitors are also having a significant market share, creating pressure on Starbucks.

Consumers do not have any cost if there are changing to other companies i.e. competitors, which creates high intensity in competition.

Differentiation of products gives competitive advantages to Starbucks which creates a moderate level of intensity in competition.[12][13]

3. External Analysis

3.1 Competitive analysis

Starbucks has a lot of competitors as mentioned before company is operating in huge industry, however three main ones are Costa Coffee, McDonald’s and Dunkin Donuts.

3.1.1. Costa Coffee:

Total revenue: £ 412 million, which is US$ 614.7 million Costa Coffee's’ aim is to serve the best coffee in the true Italian style.

Product – The main product of the company is coffee, however Costa has many other products such as hot chocolate, special drinks, cold drinks e.g. cold coffee and ice blends, different sandwiches and pastries which are loved by their customers. The marketing strategy of the Costa Coffee depends on customers liking and loving their products. Thus Costa Coffee is more interested in a pull strategy rather than a push strategy.

Price – Because of its product varieties and quality Costa Coffee believes in premium pricing. Costa Coffee relies on company’s commitment to give the best coffee taste and the best supplementary food to its customer. Therefore best value delivered to customers take importance over the price.

Place – Costa coffee is mainly based in the United Kingdom and Europe having 2,861 stores across 30 countries. Shops can be found in malls, airport and other premium places. However it is present only in the top urban cities which adds to the positioning of Costa Coffee.

Promotions – Promotions are almost absent in the case of Costa Coffee. Company uses a number of BTL (Below the line- distribution of pamphlets, handbills, stickers, brochures placed at point of sale, on the roads through banners and placards) promotions like advertising on buses and out of door media.

However promotions as low key also because Costa Coffee wants to rely more on word of mouth publicity. However ATL (Above the line- mass media such as radio, TV etc.) promotions cannot be seen.[14][15]

3.1.2. McDonald’s

Total revenue: US$ 27.44 billion

McDonald's main aims are “to serve good food in a friendly and fun environment, to be a socially responsible company, and to provide good returns to its shareholders.”

Product – McDonald’s pays huge attention on developing a menu which customers want. However, customers’ requirements change over time and in order to meet these changes, McDonald’s introduces new products and takes away from menu the old ones. Company's’ products also depends on location of restaurant e.g. in India McDonalds has a diversified product range focusing more on the vegetarian products as most consumers in India are primarily vegetarian.

Price – The customer’s perception of value is an important determinant of the price charged. Customers has their of imagination of what a product is worth. Product is not only a physical item, it also has psychological implications for the customer. If company will use low price as a marketing tool the customer may feel that quality is not as good. McDonald's has taken a huge initiative to fill in that gap in coffee and price. They offer some of the same types of coffee at Starbucks, but at lower price.

They had always have normal coffee on their menu, however now they have added popular Starbuck's imitations to their menu such as the frappes and the lattes.

Place – McDonald’s is serving around 68 million customers daily in 119 countries across 35,000 outlets. Restaurants are very constantly spread throughout the cities making them very accessible. Drive - Through options make McDonald’s products further convenient to the consumers.

Promotion – McDonald's uses an extensive advertising campaign. In addition to the usual media including television, radio, and newspaper ads, the company makes significant use of billboards and signage, sponsors sporting events ranging from Little League to the FIFA World Cup and Olympic Games. However, television ads remain the primary form of advertisement.[16][17][18]

3.1.3. Dunkin Donuts

Total revenue: $183.2 million

Dunkin Donuts aim is “to be recognized as a company that responsibly serves our guests, franchisees, employees, communities, business partners, and the interests of our planet”

Product – The main products of Dunkin Donuts are the many different types of coffee and donuts. Dunkin Donuts has over 50 different types of donuts, all with different flavors.

Price – Dunkin' Donuts has focused on becoming a cost leader, which is defined as "offering the same or better quality product or service at a price that is less than what any of the competition is able to do." There are three main ways that Dunkin' Donuts are adopting to charge lower prices than their competitors:

1. They produce more which results in a higher asset turnover allows to spread out their fixed costs over a larger number of units
2. They offer a variety of standardized products which limits the amount of product and service customization they have to do.
3. By buying in a bulk, bidding competitively over contracts, and working with vendors to keep inventories low, Dunkin' Donuts is able to keep a tight control over their supply chain. Having strong relationships with suppliers is a vital way to keep costs low

Place – There are 2440 Dunkin Donuts stores over 31 different countries. You can find the Dunkin Donuts stores mostly at A-locations, which means they are located at airports, train stations and shopping malls.

Promotions – As a main promotion source company uses web marketing and advertising. However integral are also print aids and sponsorships.[19][20][21]

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[1] Cf: Starbucks Online, January 2015. Company Information – Company Profile. Available at : http://globalassets.starbaucks.com/assets/4286be0614af48b6bf2e17ffcede5ab7.pdf